LATIN AMERICA

Falling oil prices made last year the worst for Latin America since 2009

Drop in revenue from commodity exports and strong dollar holding region back

Two people read job postings on a street in São Paulo, Brazil.
Two people read job postings on a street in São Paulo, Brazil.PAULO WHITAKER / REUTERS

The drop in commodity prices, especially that of crude oil, has spoiled Latin America’s plans to escape the economic crisis. A year ago, banks, consulting firms and international organizations predicted that the economic downturn that began in 2011 would end in 2014. The region came out of the 2008-2009 global crisis swiftly, but lost momentum soon after. According to FocusEconomics, projections grew more and more pessimistic with growth eventually falling to 1.1% in 2014.

Certain key factors affect almost all countries. On the one hand, there is the end of the so-called supercycle of high commodity prices – raw  materials account for the majority of most countries’ exports, including Mexico’s. Even though 74.8% of the country’s exports are manufactured products, it relies on crude oil to generate a third of its revenue. The price of oil fell by 46% in 2014 and the downward trend is continuing into 2015. The drop will hurt Brazil, Colombia, Venezuela and Ecuador, while benefiting importers such as Chile, Peru and Argentina. Argentina, however, is also looking for new investors to develop its own non-conventional oil fields in Vaca Muerta, a task made more difficult when oil prices are falling.

Prices of soy, an important product for Brazil, Argentina, Paraguay and Uruguay, fell by 22%. The price of copper, key for both Chile and Peru, fell by 17% and iron – Brazil’s main export, accounting for 13% of the total – dropped by 47%.

Meanwhile, manufactured products play different roles in the region’s largest economies. They represent one third of Brazil and Argentina’s exports, but only a fifth of Colombia’s. In both Peru and Chile, they make up about 14 percent of business. Venezuela barely has any manufacturing exports at all.

The drop in oil prices will hurt Brazil, Colombia and Venezuela, but benefit Chile, Peru and Argentina

What’s more, anticipation of higher interest rates in the United States has strengthened the dollar, causing a drop in commodity prices traded in that currency and a devaluation of Latin American currencies, thus threatening to hike up inflation. Analysts say Latin America will now receive less financing compared with the days of low interest rates in the United States. But governments with access to international credit markets have not yet felt the impact of this shift.

The good news is that these tight monetary policies in the United States come as it experiences its best moment of growth in recent times, benefiting those countries where it is the main trading partner, such as Mexico, Colombia and the Central American nations. On the other hand, export business in Brazil, Argentina, Venezuela, Peru and Chile will be more affected by the economic downturn in China, a big consumer of its commodities.

Every country faces its own unique challenges. According to the Economic Commission for Latin America (ECLAC), the Brazilian economy barely grew 0.2% in 2014. The organization says the country lacks the latitude to put fiscal and monetary policies in place to promote economic growth. ECLAC says the Mexican economy grew 2.1% during a year marked by efforts to attract investment for the telecommunications and oil industries and to improve the quality of education. Still, FocusEconomics warns that public discontent over violence may affect economic progress.

A wide range of results

The Brazilian economy barely grew 0.2% in 2014 and ECLAC has warned the Brazilian government that it lacks the latitude to put in place fiscal and monetary policies that promote economic growth.

In Mexico the economy grew by 2.1% but FocusEconomics says public discontent over violence may affect the economy.

Argentina's economy shrank by 0.2%. ECLAC attributes this decline to the devaluation of the peso in January 2014 and renewed difficulties with its exchange rates as a result of the country's battle with the vulture funds this summer.

According to ECLAC, the Venezuelan economy shrank 3% and registered a 63% inflation rate.

Chile saw growth of 1.9% but income tax hikes and plans to secure more rights for workers worry businesses.

Colombia's economy distinguished itself from the sluggish pace elsewhere in the region, growing by 4.8%, in part as a result of its investment plans, though cheap oil prices will also affect its economy.

Argentina shrank by 0.2%, ECLAC reports. The organization mostly blames the crisis on the devaluation of the peso in January 2014 and on the country’s renewed difficulties with exchange rates as a result of the debt crisis caused by its battle with the vulture funds in July. President Cristina Fernández de Kirchner’s government has admitted that, compared with last year, GDP shrank in the third trimester for the first time since 2009. Some financial advisors and banks told FocusEconomics that their own estimate was a 2.1% decline. Toward the end of the year, investment from China, Telefónica, and other competitors helped stabilize the peso while the currencies of other nations in the region fell. Consumption also grew in December for the first time that year.

Venezuela also sought Chinese investment to counteract its foreign currency shortage but its case is worse than Argentina’s. ECLAC says the economy contracted by 3% while carrying a 63% inflation rate – much higher than the 38.9% rate registered by Argentinean statistics bureaus. Falling oil prices raise doubts about Venezuela’s ability to pay its debts but analysts say it will be able to avoid default. They are more concerned about scarcity and the country’s messy currency exchange system, which has three types of official rate, and an unofficial rate.The falling price of Venezuelan crude presents a tremendous challenge to the country.

Chile and Peru are suffering the impact of their own reforms, but each faces its own distinct set of challenges. In Chile, higher income taxes and the government’s efforts to expand workers’ rights are worrying businesses. In Peru, on the other hand, an overly flexible labor market for young workers has led to protests. According to ECLAC, Chile grew by 1.9% and Peru by 2.8%, well below the rates of recent years.

Only Colombia distinguished itself from the modest and mediocre progress of its largest neighbors. Its economy grew by 4.8%, in part as a result of its plans for investment in infrastructure and housing, though cheap oil will also have an impact there.

Translation: Dyane Jean François